How do you handle "extra" income?

[traineeinvestor]

My relatively trivial part-time consulting income is treated the same as any other income. The only difference is, when I budget, I assume that my consulting income for the year will be zero - which will be the right number when I no longer enjoy the consulting work.

[Sunset]

Quote:

Originally Posted by Human I do the following with my part-time consulting income (in order, but dependent on earnings which vary greatly from year to year): 100% to 401k contribution Salary and bonus in an amount to maximize profit sharing Use above salary to fund IRA and HSA Feed my tech toy needs under the company :-) Any extra goes to general fun (usually travel)

+++++++++++++++ EXACTLY,

Only specification I would make is: 100% to 401k contribution (both 401K Roth and 401K IRA).

Currently because I cut back a lot, I'm just funding the 401k Roth, and external Roth IRA

[RunningBum]

Back to post 1, a question about your order:

Quote:

Originally Posted by USGrant1962 So my back-of-the-envelope plan is to fund, in this order: 1. $2K, small upgrade to my home office (Aeron chair, new laptop, some computer upgrades). 2. $XK, 1st quarter estimated taxes 3. $5K, we bought a new car and wrote the down payment out of my Vanguard MM, I'll "refund" that to my portfolio 4. $7,900, HSA contribution 5. $20K, annual iBond purchase 6. $XXK, renovations to the summer house 7. $6,500, Roth IRA 8. Q2, Q3, Q4 estimated taxes when due. These were generally already in my FIRE budget (except additional IRA contributions) so this is all just mental accounting.

Is this an actual order, or a mental one? I would fund an HSA and Roth first and foremost. If you don't have enough left over for "fun" money you could take it out of other accounts. Take #3 and #4 for best example. It doesn't make sense to pay your portfolio $5K back and run out of money before you make your Roth contribution. Better to make your Roth contribution, and if you have to, skip paying your portfolio back for the car. This way you've got more money in the most tax advantaged account.

You're probably doing it all, but if I was working, the very first thing I'd do is max out a Roth IRA with the earnings, and make certain the HSA was funded too. If that wiped out the extra income, and I wanted to have some fun with the money, I'd definitely allow myself to take a similar amount of our one of my other accounts.

[USGrant1962]

Quote:

Originally Posted by RunningBum Back to post 1, a question about your order: Is this an actual order, or a mental one? I would fund an HSA and Roth first and foremost. If you don't have enough left over for "fun" money you could take it out of other accounts. Take #3 and #4 for best example. It doesn't make sense to pay your portfolio $5K back and run out of money before you make your Roth contribution. Better to make your Roth contribution, and if you have to, skip paying your portfolio back for the car. This way you've got more money in the most tax advantaged account. You're probably doing it all, but if I was working, the very first thing I'd do is max out a Roth IRA with the earnings, and make certain the HSA was funded too. If that wiped out the extra income, and I wanted to have some fun with the money, I'd definitely allow myself to take a similar amount of our one of my other accounts.

It is approximately chronological in order, really just a checklist I jotted down on a post-it note. I'm waiting on the Roth to make sure that planned income plus consulting plus some cap gains I sold in January to fund much of this year's spend don't push me to phase-out territory (I know, first world problem). I also have more thinking to do on solo-401K and other self-employment perks, as I've said in other threads I'm over-deferred and would prefer to have more taxable funds for tax management strategies.

[sengsational]

This post won't answer "which of the 8" to fund, but that's not something I can contribute to very well.

For me, "extra income" would affect my cash flow calculation, but would not affect my actions (fungability and all of that).

Many of the things in the OP list would fall into the category of "outside the monthly burn rate" in my cash flow spreadsheet. Other things include once annual payments, like real estate taxes and auto and homeowners insurance. In other words, the "lumpy" stuff gets separate, tagged entries. The rest goes into the burn rate, which is uniformly subtracted every month.

The result is a decreasing available spending balance, which I restore in December. That restoration is designed to supply the lumpy and uniform expenses in the following year.

[ArkTinkerer]

We have only been FIREd about 2 years. I was doing some odd consulting and simply told him if he wanted me to keep coming around every he'd have to pay a certain amount every month and pitch in some time/labor (his or his companies) on some of my fun projects. He stepped right up. Now I wonder if I sold myself short all those years! SWMBO had commented how a local college library was in a jam after losing another librarian. I said "Why don't you offer to do some part time work there?" A lot different for her since she really didn't need the job. So now she works there a few hours a few days a week. No compunction about telling them she won't be in if she has anything else she simply wants to do. Had to tell them she really didn't want to go to work full time. Bottom line, we didn't have to sell assets like we planned at this stage. Haven't dipped into savings at all. In fact, wife put away a small amount more into a new retirement account. Downside? I really should be selling some assets--rental property. We both are getting fed up taking care of them. But it actually takes time and effort to manage the sales and its easier right now to just coast along...

[HI Bill]

Just go online and turn all statements to online only!

[audreyh1]

Quote:

Originally Posted by USGrant1962 When I retired last year I had a withdrawal plan of $X/month that I would transfer from Vanguard to my bank for expenses. No problem so far. Now, I have some consulting income and instead of just blobbing it in with the rest of my portfolio, or transferring to my bank to offset my monthly draw, I have in mind to pay for various specific things with it. So my back-of-the-envelope plan is to fund, in this order: 1. $2K, small upgrade to my home office (Aeron chair, new laptop, some computer upgrades). 2. $XK, 1st quarter estimated taxes 3. $5K, we bought a new car and wrote the down payment out of my Vanguard MM, I'll "refund" that to my portfolio 4. $7,900, HSA contribution 5. $20K, annual iBond purchase 6. $XXK, renovations to the summer house 7. $6,500, Roth IRA 8. Q2, Q3, Q4 estimated taxes when due. These were generally already in my FIRE budget (except additional IRA contributions) so this is all just mental accounting. But, I find that thinking this way makes my paid consulting gig even more fun. Being a megacorp lifer and LBYM, I've never really had to worry earning X to pay for Y. I don't really now, but find it kind of rewarding to get a consulting check and say to myself "this pays for my laptop and Aeron chair". For folks that are FIRE, what are your strategies for "extra" income? Do you chuck it in your portfolio, blow the dough, offset your planned spending, or something else?

Sure, I collect my unspent funds and they are available for splurges.

I’ve already gotten a large enough portfolio where withdrawals more than pay for our lifestyle, so no need to add more to the pot!

[audreyh1]

Quote:

Originally Posted by OldShooter This is maybe a slightly extreme example of what Richard Thaler calls "mental accounting." (https://en.wikipedia.org/wiki/Mental_accounting) We all do it, but I think it's very useful to recognize it for what it is. There is no "extra" income. There is only income.

That makes no sense to me.

He’s calling it extra income because it’s more than they had counted on or budgeted for, and it’s beyond what they are pulling from their investments.

So of course it’s extra.

[Al in Ohio]

Quote:

Originally Posted by USGrant1962 When I retired last year I had a withdrawal plan of $X/month that I would transfer from Vanguard to my bank for expenses. No problem so far. Now, I have some consulting income and instead of just blobbing it in with the rest of my portfolio, or transferring to my bank to offset my monthly draw, I have in mind to pay for various specific things with it. So my back-of-the-envelope plan is to fund, in this order: 1. $2K, small upgrade to my home office (Aeron chair, new laptop, some computer upgrades). 2. $XK, 1st quarter estimated taxes 3. $5K, we bought a new car and wrote the down payment out of my Vanguard MM, I'll "refund" that to my portfolio 4. $7,900, HSA contribution 5. $20K, annual iBond purchase 6. $XXK, renovations to the summer house 7. $6,500, Roth IRA 8. Q2, Q3, Q4 estimated taxes when due. These were generally already in my FIRE budget (except additional IRA contributions) so this is all just mental accounting. But, I find that thinking this way makes my paid consulting gig even more fun. Being a megacorp lifer and LBYM, I've never really had to worry earning X to pay for Y. I don't really now, but find it kind of rewarding to get a consulting check and say to myself "this pays for my laptop and Aeron chair". For folks that are FIRE, what are your strategies for "extra" income? Do you chuck it in your portfolio, blow the dough, offset your planned spending, or something else?

I often target it for a nice vacation. Like going on a European cruise instead of just Florida.

[DrRoy]

Before RE, when I had some unexpected income, I would spend 10-20% on something fun and save the rest. Your plan seems fine.

[flintnational]

Personally I fall into the money is fungible camp. However, in my extended family there is a concept known as "found money". From what I can tell found money has mystical powers and is not subject to fungibility. Also, from observation, found money seems to be the best kind of money since it does not come with obligations to save, invest or pay bills and apparently demands to be spent on frivolous items. Found money seems to bring great joy to those fortunate enough to posses it (no matter how short the possession period).

[joeea]

Quote:

Originally Posted by audreyh1 That makes no sense to me. He’s calling it extra income because it’s more than they had counted on or budgeted for, and it’s beyond what they are pulling from their investments. So of course it’s extra.

Thus, one should budget for 80% of your normal income.
That makes the remaining 20% "extra" - splurges await! YOLO!

[audreyh1]

Quote:

Originally Posted by flintnational Personally I fall into the money is fungible camp. However, in my extended family there is a concept known as "found money". From what I can tell found money has mystical powers and is not subject to fungibility. Also, from observation, found money seems to be the best kind of money since it does not come with obligations to save, invest or pay bills and apparently demands to be spent on frivolous items. Found money seems to bring great joy to those fortunate enough to posses it (no matter how short the possession period).

But what does “money is fungible” mean in this context? It doesn’t mean anything. They have more.

So what if someone wants to splurge when they receive additional income when they are already retired, so apparently have already saved “enough”, supposedly no debt other than mortgage, are already living within their means, etc.

In the OP’s context he has more income. He has no obligation to add it to his retirement portfolio. It makes more sense for him to enjoy it now while he can. Personal choices, of course.

[audreyh1]

Quote:

Originally Posted by USGrant1962 For folks that are FIRE, what are your strategies for "extra" income? Do you chuck it in your portfolio, blow the dough, offset your planned spending, or something else?

We consistently underspend our income from our retirement portfolio. That is kind of like having extra income. I mean, it really is, because our current portfolio withdrawal does in fact exceed even our well-padded budget.

I don’t return unspent funds to the retirement portfolio because I think it’s big enough and I don’t want to take those long-term investment risks with unspent funds.

So I let excess funds accumulate in short term “safe” investments and they are available to draw on for whenever we want to splurge, or buy some big ticket item like a new car, or maybe our future income drops due to a series of bad market years, or maybe we need to help someone in a family emergency. It’s available for all of that and should be able to cover multiple situations (knock on wood!).

What if the short-term pile gets “too big”? Well I honestly don’t care about that. For me it represents incredible financial flexibility. Maybe, if things continue, we’ll end up focusing more on increasing our spending, including gifting, to reduce the additional unspent funds.

Some might suggest lowering our withdrawal rate. But I don’t see the point of dying with a bigger pile.

And as we age it probably makes more sense to increase the withdrawal rate instead.

[audreyh1]

Quote:

Originally Posted by joeea Thus, one should budget for 80% of your normal income. That makes the remaining 20% "extra" - splurges await! YOLO!

Well in that case 20% on splurges is in the budget.

Nothing wrong with allocating 20% of the budget on splurges.

But that is not the OP’s situation as his income increased.